As private markets have exploded in the past 10 or so years, investment opportunities are emerging.
As the founder of Rocket Dollar, occasional angel investor in technology companies, and Certified Financial Planner, I diligently follow investment trends.
One asset class, for example, that continues to be the cornerstone of investment strategy is real estate. This is especially true when investors take advantage of the tax-deferred savings associated with making real estate investments through a Self-Directed Solo 401(k) or Self-Directed IRA. Aside from the tax-deferred savings, investors also benefit from the steady income and gradual appreciation real estate investments typically provide.
Another trend that I am seeing is how access to the private markets is becoming an integral part of a new strategy I like to call 21st century investments. Among the many alternative investments are cryptocurrencies (with use cases or underlying assets), crowdfunding platforms and direct investments into technology startups.
However, it’s the opportunity around the private markets that has really caught my eye. And the good news is that both individual and institutional investors can avail themselves of this opportunity.
It is important to look at what brought us to this point. In the past 10 years, we’ve seen fundamental changes in the investment arena as public and private markets have shifted in tandem with one another.
Since the mid-1990s, the number of companies making up the stock market has declined by over half, from 8,000 to 3,627 in 2016, according to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business, as reported in The New York Times.
This decline in the number of companies going public has coincided with the rise of venture-capital-backed private markets. While institutional and personal investors are used to being able to invest in individual private companies through a venture capital firm, angel network or crowdfunding website, there are other emerging options. For example, institutional investors have the Prime Unicorn Index (commonly known as the Index). I haven’t found anything like the Index, which calculates the valuations of large private companies by monitoring their required filings through a network that the Index has developed in the legal community. Unicorns must make these filings, which the Index then incorporates into the company’s valuation.
The Index consists of more than 100 such unicorns and those approaching unicorn status, whose valuations are aggregated into one overall value. Access to making trades on the Index provides diversification opportunities across a broad swath of industries, including technology, finance, transportation and health care.
Given that the U.S. has experienced the longest bull market since World War II, it might be tempting to think that that the Index cannot go down. But this is a fallacy. If you go back and look at the number of valuations and down rounds in 2002, 2003, 2008 and 2009, you’ll see that. There are plenty of examples of this, such as genomics startup Human Longevity Inc., which recently lost 80% of its valuation (subscription required).
Additionally, just recently, the markets appear to have entered correction territory, so there well may be an increased likelihood in the coming year that the Index will experience some fluctuation as near-unicorns and unicorns experience decreases in valuations as market drivers adjust to the inevitable changes in the economy.
Changes in market conditions affect individual investors as well, and can have a more profound effect on their investment decisions.
Individual investors also have options in the private markets. One of these is the SharesPost 100 Fund, which provides access to late-stage venture-backed companies. According to the fund's website, "many high-growth companies staying private longer than ever," and "a significant portion of their value appreciation typically occurs before their entry into the public markets," making the SharesPost 100 Fund an interesting option.
These emerging options portend more opportunities than ever for institutions and individuals to participate in the very lucrative private markets, while diversifying one’s portfolio and preserving long-term wealth.